Exam 12: Using Costbenefit and Cost-Effectiveness Analyses in the Community Context

Correct Answer:

Verified

Both CBA and CEA require significant amounts of data. Therefore, it is essential that organizations work in partnerships with selected community agencies and evaluators to develop the capacity to collect data relating to all cost and benefits of a proposed program or purchase. With this understanding in mind, one can utilize the steps below to conduct a cost analysis:
Define the analysis: The first step in any cost analysis is to define it. The audience, or the group of people who will use the results, can range considerably on any given cost analysis. Therefore, one must take careful consideration as to how the information is communicated to the various groups. In addition to communicating information to a broad audience, you must also be able to communicate the parameters of your cost analysis so the audience understands its limitations. Cost analyses require a number of estimates and assumptions to determine the net benefits (CBA) or cost-effectiveness ratio (CEA). These estimates and assumptions will significantly impact the results, which can inadvertently change the final decision and recommendation provided. In doing this, one must allow partners to decide what type of analysis to do, determine who has standing in the analysis, specify the alternatives or basis for comparison, decide the time frame for analysis and specify why it is appropriate, and determine a discount rate.
List and monetize impacts (CBA) or quantify benefits by unit of effectiveness (CEA): Now you need to generate a list of costs and benefits from each perspective identified in Step 1. In Step 2, you need to include all categories of costs and benefits. Then, once you have a list of the costs and benefits, you must monetize each impact (CBA) or quantify benefits by units of effectiveness (CEA). Note that the costs for CBA and CEA are the same, only the benefits are different. Finally, the partners will need to justify how they monetized the intangible cost or benefit.
Discount future net benefits to determine present value: When determining present value, your analysis will include only the costs and benefits that exceed the status quo because the organization will incur certain costs and benefits even if it does not move forward with the proposed program or purchase. The total cost for the program or purchase is the difference between the full cost of the program and its current costs, and the total benefits for the program or purchase is the difference between the full benefits and its current benefits. Once you know the total cost and benefits, you can calculate the present value of net benefits.
Calculate net present value (CBA) or cost-effectiveness ratio (CEA): Now that the value of costs and benefits are in the present value, you can calculate the net present value (NPV) by summing the present value for each year of data. To calculate the cost-effectiveness ratio, we need to compute the present value of total costs, which is divided by the unit of effectiveness.
Perform sensitivity analysis: Recall that the results of CBA and CEA are sensitive to the estimates and assumptions made at the beginning of the analysis. Before moving forward with a capital purchase or implementing a new program, you need to test whether your decision would change if the estimates used in the initial analysis differed meaningfully from reality. That is, in Step 5, it is particularly important to assess whether your decision would still be the same if conditions were worse than originally expected.
Make a decision and provide recommendation: If the benefits outweigh the costs of a project, you generally recommend the project move forward because the benefit to those with standing in the analysis will benefit from the project or purchase. That is, if the NPV is positive, you recommend moving forward; but, if the NPV is negative with the costs outweighing the benefits, you would not recommend the project move forward. If the initial NPV is positive but changes to negative during sensitivity analysis, you know the project is sensitive to the estimates used in the analysis, and you must caution decision makers about the conditions in which costs would outweigh benefits.

Correct Answer:

Verified

Cost analysis is, in itself, an evaluation method. However, when we think about evaluations, we often think of those that assess the extent to which a program achieves its results during and after the program is complete, not before. After all, evaluations exist because of two factors, "first, the fact that there is not enough money to do all the things that need doing; and second, the realization that even if there were enough money, it takes more than money to solve complex human and social problems." These two factors are the foundation for cost analysis and evaluations, so when we combine evaluations and cost analysis we have evidence and information about not only the effectiveness of the program as well as whether it was also cost-effective, or worth the resources invested in it.
During an evaluation, we ask the organization(s) to describe its strategy for addressing the issue at hand in terms of a "theory of change." In other words, we ask them to describe how and why they expect the program to achieve the intended outcomes or benefits. In doing so, we identify the implicit and explicit assumptions behind the program or initiative (program theory or theory of change), quantify the resources that the program or initiative needs (inputs), identify the specific actions that will be implemented (activities), identify the measures that would be used to track the activities (outputs), and identify the benefits (outcomes). Using this information, we are able to create a logic model to provide guidance during both the evaluation (inputs, activities, outputs, and outcomes) and cost analysis. This information allows us to link the inputs, activities, and outputs with the costs of the program and the outcomes with its benefits.
Logic models and cost analysis are stronger when performed together, and neither carries much weight without the other. That is, the cost of a program only means something when we know whether the program is effective, and the effectiveness of a program means little when organizations cannot afford to implement it. By using the two in support of each other, a case can be made that the program works and is worth it, or that changes need to be made to improve its effectiveness or cost.